Huge interest payments will cripple Reds

Tom Hicks got his PR firm to confirm last night what we’ve known all along – Liverpool Football Club will be paying the interest on the loan he took out to make himself richer.

Hicks, alongside his long-lost partner George Gillett, persuaded Liverpool’s then chairman David Moores to sell his shares a year ago, and persuaded him to recommend the rest of the shareholders do the same. Moores, with the help of chief executive Rick Parry, convinced shareholders and supporters that these two guys from America were what we’d scoured the globe looking for: the investors that would get us back on par with Manchester United in terms of financial muscle, which was the key to getting us back in contention for league titles after a long barren period in the wilderness.

The new investors we were looking for would ensure that we could build a new stadium without having to reduce our transfer budget during the development period. In fact we were looking for investors with the financial capabilities to increase our transfer budget from the off, a long-term plan that would see us ultimately become self-sufficient, but in the early stages would see us working from that initial injection of capital.

Unfortunately the two people who bought our club were financially incapable of doing that. They had to borrow heavily to buy the shares from the previous holder, and despite their boasts of clearing Liverpool’s debt, which was around £45m before their involvement, all they’d done was shuffled it into a different place. They borrowed nearly £300m when they took the club over, and that’s now increased to £350m.

Their argument is that most of it isn’t secured on the club. £105m of it is now owed by the club. Their trumpeted removal of the debt was all well and good – but it only got put into a different pocket for a year, and has now been put firmly back into the club’s pocket. And in that year it’s more than doubled from that £45m at the start of last year, to the £105m figure we see now.

They talk about the remainder of the debt being at the “holding company level”. That’s all well and good, but the holding company only has one asset – Liverpool Football Club. The owners, Hicks and Gillett, technically don’t own Liverpool FC. They own the holding company, which in turn owns Liverpool FC. The £245m debt the holding company now has is secured on the owners and their assets, but that security would only be required if the holding company was incapable of making the payments on the loan. So who will the holding company be getting its money from?

Well Hicks got his PR company to own up for him. A spokesman from Financial Dynamics, said on his behalf: “The holding company debt is supported by the assets it acquired and should there ever be any shortfall in cash flow at the club or anywhere else in Kop in any given year, Kop’s ownership, under the terms of the financing package, is prepared to fund whatever is required. The debt is being handled exactly as it is handled at the vast majority of professional sports teams.”

Think about this carefully. Liverpool FC will need to find approximately £9m a year in interest payments to keep on top of the £105m it is now in debt by.

The holding company will need to find approximately £21m a year in interest to keep on top of its £245m debt. The holding company (known as Kop) does not have any other means with which to generate income than that which it is paid by Liverpool Football Club. So it is expecting Liverpool Football club, as well as finding its own £9m interest, to also find another £21m interest to pay for the “Kop” loan. That’s £30m in all that the club has to find each year the debt is at this level. And let’s face it, the debt’s not going to decrease in any short space of time.

If, for some reason, there was no way on earth that Liverpool Football Club could pay the £21m interest to the holding company, the statement says that “Kop’s ownership (Hicks and Gillett) …is prepared to fund whatever is required.”

Now when you read a statement like that at face value you would be forgiven for assuming that the owners are prepared to see the club through any future difficulties. Say, for example, Liverpool failed to qualify for the Champions League next season, and could only afford, for example, £4m of that £21m interest needed by the holding company, that the owners would happily dig deep and stump up the other £17m. Well think again.

In that example, the owners have three choices. Firstly, stump up the £17m from out of their own funds. Secondly, allow the banks to use the security the owners put down against this loan to recover the money they required. Finally, use the assets the club has in order to find that £17m.

They aren’t going to go for either of the first two options.

So faced with a shortfall in the holding company’s requirements, the owners would seek to use the club’s assets to pay that interest. They may consider selling a stake in the club to another investor, although if the club’s in such a precarious financial position most investors would steer clear for the sort of price the owners would be asking. There’s very little else that can be sold – except players.

And this is where the club starts to decline further and further. Even if we qualify for the Champions League, we’re already using up £30m of our annual income on interest payments to cover the owners’ own investment. That’s before we start borrowing the £300m+ required for the new stadium. We’ll simply be unable to afford high-quality player purchases by the time we’ve paid off that year’s debt interest. The teams above and below us will have the funds to buy, and their squads will improve accordingly. Ours will at best stagnate, until the year comes where we do drop out of the Champions League places.

And if we are out of the Champions League places, we lose a potential £25m. The holding company finds that after we’ve paid our wage bill, paid instalments on past transfers and spent what we need to spend for the day-to-day running of the club, we can’t pay them their interest. And to the holding company there’s only one way to achieve that. Goodbye Fernando Torres, goodbye Pepe Reina, Xabi Alonso, Javier Mascherano, Steven Gerrard – it doesn’t matter, who. Just as long as that interest payment is made.

And now, not only have we failed to get our squad up to the standards of our rivals, not only have we failed to at least keep the gap between us and our rivals the same, not only have we failed to at least keep our own squad as strong as it was, we’ve actually had to weaken our squad.

Under these owners the club is in a mess, the future of the club is on a tightrope.

We’re gambling on Champions League qualification, and even then on relative success in the Champions League. Without it, we are in serious danger of following the same path Leeds followed. And don’t for one moment think “it can’t happen to us”, because it can.

And the chances are that Hicks and Gillett will have ridden off into the sunset long before it gets to the Leeds stage – they’ll transfer the debt onto the club’s assets, pay off their own loans and disappear. Their gamble is weighted in such a way that if they win, they get rich, but if they lose, they just don’t get any richer. They don’t lose. The only losers are Liverpool Football Club and its supporters.

Dubai International Capital are said to still be in negotiations with Hicks and Gillett to get the club out of their hands. Even though the finance deal went through, it doesn’t mean DIC won’t buy. And there’s no saying that DIC will still please Liverpool supporters all the time. But it’s almost impossible that they could be any worse.

We’ve got to get behind the players and the manager; they need us now more than ever. Those dissenting voices on phone-ins and message-boards who think we’re going to be alright under Hicks after all need to sit back and think about what’s really going on.

The owners will bail out as soon as they see a threat to their existing assets – we’ve got to do all we can to bring that threat forward.

Totally agree and posted something similar on another website.The scary thing is getting the 21M(assuming that LFC can afford it) into the holding company.Will it be an inter company loan??If so,how does the holding company repay it?If it is in the form of dividends-there is then a tax liability.The model on our current income is simply not sustainable.All this without having financed the new stadium.We are doomed unless they sell.
What makes me angry is that the scheme put in place to buy the shares -if you had to see through it(‘pierce the corporate veil”) is a contravention of the company laws(prohibition for a company to assist in the purchase of its’ own shares).The scheme/ structure is legal but the effect remains the same.

I completely agree with you. The club is in a hugely precarious position. Just when the future of the club was beginning to look far brighter, it’s depressing to think that the club has taken potentially a huge step backward, if not a fatal step. DIC could be the key to saving the situation, but then again there are never any guarantees. I’d say Parry and Moores can’t sleep at night. Shame on them.

Eloquently argued and succinct. You appear to have understood the situation precisley, I have the same concerns as you. Your point about the Leeds scenario is spot on and one which I was considering this morning. Whist other clubs have begun to climb the ladder of success ( Aston Villa, Man City etc) Our club has simultaneously jumped onto a slippery pole. Your sums add up. Well done for saying what everybody else needs to realise. Just one point though, why should DIC invest heavily in LFC now? when by the end of the season we may not have even qualified for CL next season; after all we’re not exactly consolidated into 4th place right now. Such a situation would make LFC a cheaper proposition to buy into.

You might be right that promises have been broken but we are where we are and I don´t see only doom and gloom ahead. Does it really matter, in the end whether we finance a new stadium and new players through loans or capital from the pockets of the owners? In the end we always knew that we were getting owners who are capitalists and capitalists prefer to make money instead of losing it. To enable LFC to make money they need to increase revenue dramatically, through ticket sales, TV, Champions league, player sales and merchandise. Loans increase the pressure on everyone involved but to already “give up” like some fans are doing is ridiculous. This club should be earning twice as much revenue than it is doing today, perhaps 10 times as much considering the global fanbase of the club. This underutilised resource is key to paying back loans or dividends to the owners and the new stadium is one step in getting this done. Would you rather be in the position of having the old owners, the current stadium and lack of funds for moving forward? Today´s sale of sissoko is a positive step towards finally getting some money back through player transactions. All to often we bought poor players for huge sums and lost quality players for nothing. Hopefully that is behind us but merchandise sales and TV/Internet sales will hopefully follow, making some 30-100 million a year profits possible, if not then LFC might just be doomed like some people seem to have already conceded.

it’s now or never , the club needs us more then ever .
we the supporters can make the difference we are the KOP let’s show them we’re not just a football club .
we’ve put our hearts in this club and no one is bigger then the club.so every time we’re in Anfield let’s show them how we feel about the yankees.give us our club back.and give it to who can really take care of it.

Moores, our ex-chairman who promised the world from our new owners and took plenty of cash in return, is quiet.

and Parry, unlike David Gill who spoke aplenty when the Glazers took over, is quiet.

The only person who fought his corner was Rafa – and for that and the trophies I have alot of admiration for him. I just hope the ship stabilises within the club for him to achieve what he deserves.

The fans must not now go quiet.

Yes, DIC may not be a better option but it’s in their interest to win, win, win – they only back winners – or at least that’s what their horse-racing business suggests.

We, the fans, must continue to be vocally against the new regime – and I really believe we need to question whether we can delay the planning process in anyway to put the Americans off even more. Given that planning consent is a local decision I’m sure this is possible.

Hicks cannot be allowed to hoodwink fans, talk about everything but the debt on radio and use financial dynamics, a PR company lacking in local identity or allegiance to the fans, to stage manage a negative PR message.

PR only works if fans want it to work.

Delivery works regardless of PR because you can see the investment and the balance sheet. It’s for this reason and their lies that Hicks and Gillett have failed Liverpool FC.

We need to get them out by mobilising Political, Media, Fans/local people, our so-called celebrity friends and civil servants against these lying Americans.

I think a 71,000 state of the art stadium, higher ticket prices, better commercialism off the pitch, better results on the pitch and a more positive outlook will enable the Reds to pay off debts and move forward and achieve our goals. Of course I may be talking sh### but I hope not. I dont however trust DIC, I think we should of gone with Steve Morgan in the first place but it seems that D.R. Moores wanted to make as much cash out of LFC as he possibly could, and as for R.N.Parry B.Sc, F.C.A. personally I’d bring back flogging. It’s all a sorry mess but keep the faith boys.

Spot on! But what is the solution to all this mess? Now that we are in a mess can anyone suggest how we can penalize these two ‘yakee’ muppets without our club ending as LEEDS Part 2? These two american muppets know very well that the fans can not change anything as long as they own the club. Next step is that the Ticket prices go up to cover the loans.

Gillettes silence speaks volumes. It seems clear to me that him and Hicks have fallen out over the way the debt has been laid on our club.Thats why his son has once again disappeared.The refinancing means nothing it just give Hicks more time so he won’t be rushed by DIC.Notice that Gillettes signature was missing from the recent revelations with regards the stadium and the financing.Hicks was talking to DIC as late as last friday.The Yanks will sell at least Hicks certainly will its just a matter of DIC offering the right amount.Morgan never had a chance of buying LFC he hasn’t got enough money and Moores wouldn’t sell to him.

Why do you say Morgan did not have enough money? Hicks and Gillet bought our club with no money of their own and have saddled the Reds with millions of pounds of debt which will take years to pay off. I think that although Morgan may not have been no where near as wealthy as the americans his business dealings and knowledge would of benefitted the club in a more positive way and we would of been in a much healthier state. It really is not rocket science.

Come on you Reds supporters we will not go down without a fight neither will we go down. Yes we have a liar and smooth talker Hicks acting as the spokesman and a we also have an apparently deaf and dumb partner hiding from us, but there is much to be greatful for this is Liverpool’s time we have a good Manager and a great squad of players a new stadium in the not tooooo distant future and believe it or not even the two hard hearted business men who want the club to succeed and fill their bank accounts.
Yes that right they want this team to make money for them it is in their best interests to make sure they support the Manager and get the tools (players) to do the job.
Doom and gloom will serve no useful purpose so stand up for the team and lets hope this period of unrest is behind us. My father told me many years ago better the devil you know than the devil you don’t know, so maybe it’s fate that kept the DIC out of the picture.

Thanks for the great analysis again. There’s a few similar doing the rounds, eg Guardian Unlimited, but they all seem to miss one point that you hit spot on: any shortfall in interest payments will be made up from club’s assets and *not* from the owners’ own pockets. Its naive to think otherwise.

Now, another point I’d like to raise is if the club will cop the interest anyway, why has the debt been split between LFC and Kop Holdings? My suggestion is so that the club can be more easily sold off. Then the Kop Holdings debt can be wiped out with the proceeds leaving Mssrs Hicks and Gillett with a nice tidy profit.

But even if the club is sold in the near future, yeah let’s enjoy a glass of champagne but let’s not get over-excited. I think Liverpool fans have got to get over the folly of seeing club owners as sugar daddies, whoever they may be. I think the best we can hope for realistically is that the club is run sensibly with an eye on long term success and profitability, without being burdened with the debt the owners ran up to purchase it. In my opinion, LFC has to accept the ongoing costs of running the club, such as players and new stadiums, like it or not. The real visionary owner will be the one who taps into the marketing potential to create the revenue stream to pay for all these things, and that’s what’s really been missing in the past. Let’s face it, the club hasn’t been run spectacularly well even before these two yank buffoons turned up.

Jim, I believe something you also need to point out is that the £45 million they have borrowed to fund player purchases is going to make the short term purchases look ok. i.e. that we are able to function despite paying 30m a year in interest payments. The way I see it working is we spend big this summer 50-60m and everyone says – look they are spending big despite everything. However, this is the borrowed money we already have. Next summer this won’t be there and the £30m will really start to bite from this point onwards.